Wall Street’s revolving door lets white-collar crime thrive despite whistle-blowers

Shortcomings by US banking regulators allow rampant financial crime to go unchecked on Wall Street

Kareem Serageldin
Former Credit Suisse executive Kareem Serageldin is the only person to have been jailed for their part in the financial crisis, though the judge acknowledged his actions were part of a wider problem 

In September 2008, years of unchecked borrowing, irresponsible mortgage lending and ego-fuelled risk-taking on Wall Street finally came to a head. The shockwaves created by rampant banking malpractices threatened to bring the world’s financial system crashing down.

Astonishingly, only one man has ever spent time in jail for his part in the financial crisis. We can be certain, however, that the blame for the 2008 crash does not lie solely in the hands of the convicted Kareem Serageldin. Sentencing the Credit Suisse executive to 30 months in prison, US District Court judge Alvin Hellerstein acknowledged Serageldin’s conduct merely represented “a small piece of an overall evil climate within the bank and with many other banks”.

In the years since the crisis, the absence of any significant convictions has come to show the worrying extent of corporate impunity on Wall Street. While everyday Americans have been driven out of their homes and jobs, having lost a collective $13trn in household wealth, the individuals at the highest echelons of ‘Corporate America’ have been largely unaffected by their own financial gambling.

“There is no accountability in banking or in government”, Citigroup whistleblower Richard Bowen told World Finance. As early as 2006, Bowen began to ring internal alarms at Citigroup after observing first-hand how the bank would repeatedly engage in risky business practises, including carelessly certifying poor mortgages as quality ones. Yet when Bowen took his concerns to Citigroup’s board of directors and called for an external investigation of the bank, he was unceremoniously sacked.

When Bowen took his concerns to Citigroup’s board of directors and called for an external investigation of the bank, he was sacked

Unable to ignore his anxieties over Citigroup’s financial malpractices, in 2008 Bowen turned to the US Securities and Exchange Comission (SEC), handing over 1,000 pages of evidence of the bank’s fraudulent activities. Far from delivering a crackdown on corporate crime at Citigroup, the SEC became yet another obstacle in Bowen’s mission to expose the truth.

“The SEC not only buried my testimony, they locked it up”, said Bowen, now a senior lecturer at the University of Texas at Dallas. Incredibly, instead of using Bowen’s damning evidence to pursue and convict wrong-doers at Citigroup, the SEC classified his testimony as ‘trade secrets’ and have repeatedly refused to release it to the public.

As for the reason behind this failure to investigate his claims, Bowen pointed to an “incestuous” revolving door relationship between Wall Street banks and the regulator. “Anyone who leaves the SEC has a ready-made position within the banks”, the Citigroup whistleblower explained.

Wider concerns about the US financial industry
While Bowen may have been one of the first to raise concerns over the SEC’s relationship with Wall Street in the aftermath of the 2008 global crash, he certainly isn’t alone in his ongoing scrutiny of the regulator.

This August, the SEC came under intense fire from critics after a high-profile whistleblower publicly attacked the commission’s prosecuting practises. Eric Ben-Artzi, a former Vice President of Risk Management at Deutsche Bank, made history by becoming the first whistleblower in the programme’s existence to turn down a monetary reward. After rejecting the $8.25m sum offered to him by the SEC for his role in exposing improper accounting at Deutsche Bank, Ben-Artzi went on to pen a scathing opinion piece for the Financial Times in which he explained his reasons for refusing the reward.

In his feature for the site, Ben-Artzi called the SEC’s investigation of Deutsche Bank “disappointing”. He argued that, by simply subjecting the bank to a $55m fine instead of prosecuting the individuals responsible for the crime, the SEC has allowed top executives at the banking giant to retire with “multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet”. In stark contrast, the bank’s shareholders and rank-and-file employees are now “losing their jobs in droves”, having been forced to bear the burden of their managers’ financial malfeasance.

For Ben-Artzi, this failure to punish the real perpetrators represents all that is wrong with the current regulatory system in the US. Just like Richard Bowen before him, the Deutsche Bank whistleblower argued the entrenched revolving door culture on Wall Street enables guilty executives to escape punishment time and time again.

“This goes beyond the typical revolving door story. In this case, top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were ongoing”, Ben-Artzi explained.

In 2011, Robert Rice was the chief lawyer charged with leading the internal investigation into improper accounting at Deutsche Bank: by 2013 he was serving as the SEC’s Chief Counsel. Similarly, Robert Khuzami was appointed as Director of the SEC’s enforcement division in 2009, after spending seven years working as Deutsche Bank’s most senior lawyer in North America.

Lessons not learnt
This revolving-door culture remains part and parcel of life on Wall Street. The current chair of the SEC, Mary Jo White, has repeatedly come under fire for her links to the banking industry. White worked for over a decade as a lawyer for some of the biggest Wall Street financial firms, establishing long-lasting relationships with a host of top banking executives: Rice and Khuzami included. Last year, Massachusetts senator Elizabeth Warrant took aim at White in a 13-page letter, accusing the SEC chair of being an “extremely disappointing” leader, affected by several “conflicts of interest”.

Since the 2008 banking bust, 20 global financial institutions have paid over $235bn in fines and settlements to various government entities

The unavoidable similarities between the Bowen and Ben-Artzi cases sadly show lessons are still yet to be learned from the 2008 financial crash. In lieu of seeking lengthy prison sentences for liable executives, the SEC focuses instead on reaching settlements with banks found guilty of misconduct. Since the 2008 banking bust, 20 global financial institutions have paid over $235bn in fines and settlements to various government entities. Yet this quarter of a trillion-dollar sum has been taken straight from shareholders’ pockets, allowing the responsible individuals to avoid personal fines or prosecutions.

Paying out shareholders’ money, however, will never discourage criminal behaviour among banking executives, while removing the threat of prosecution allows white-collar crime to thrive.

With no deterrents in place to discourage financial malfeasance and no accountability for the individuals responsible, the same reckless behaviour behind the 2008 global crash continues to run rampant on Wall Street. Unless this vicious cycle can somehow be broken, the global banking system may spiral into fresh disaster. Bowen has a grave warning for the Wall Street world: if its corrupt practises are not stamped out, then the next crisis will be “substantially more devastating than the last”.